Institutional bond trading volumes boomed last year, everywhere except Japan. Global bond trading by institutional investors hit $25.32 trillion in 2002. Bond assets under management climbed to $21.6 trillion. One in ten funds account for four in five trades. And the bond markets are much more innovative than the equity markets.
Or so says a new white paper on trends in the global fixed income markets, published today by Greenwich Associates. The white paper, entitled “Global Fixed Income Proves A Self-Transforming Market,” charts booming bond markets in Asia ex-Japan, but especially in the Americas and western Europe.
Despite this, fixed income desks are retrenching. The reasons for this, speculates Greenwich, include the shrinking asset values of institutional investors as equity markets tank, and corporate credit downgrades driving up demand for government and investment grade corporate bonds in relatively short supply.
More importantly, Greenwich also points out that institutional investors are dividing their business between a smaller number of broker-dealers, because they “want to matter more to their dealers,” and to reward the good at the expense of the bad. Institutions, tiring of the lack of transparency in fixed income, are also pressing for a better deal from the favoured few.
Nearly two thirds of institutions review dealer relationships on a formal basis at least once a year, making personal relationships and good quality service more important than ever. With firms being assessed on back office errors as well as sales coverage, research, liquidity provision, breadth of product and allocation of new issues, “account management is in vogue,” says a Greenwich analyst. The most important criteria are sales coverage, research and liquidity.
On the other hand, says Greenwich, broker-dealers are playing the same game: they are devoting most attention to the most profitable accounts. They will be interested to read that Greenwich found good research does not necessarily lead to increased business. The trick seems to be face-to-face contact.
The report also notes recent growth in high yield and emerging market debt, asset-backed bonds (or “structured” bonds, as the current jargon has it) such as MBSs, CDOs and CMBSs, and in credit derivatives. Greenwich expects the growth to continue.